Existing retirement plans more useful than flawed 'myRA'

All of a sudden, the powers that be back in the nation’s capital are taking an interest in helping Americans save for their retirement.

In his State of the Union address, President Obama introduced a plan called “myRA,” designed to help workers who lack a workplace retirement savings plan like a 401(k). It would allow initial investments of $25 and subsequent contributions of as little as $5.

The myRA will be a clone of the Government Securities Investment Fund available as part of the Thrift Savings Plan for Federal employees and members of the uniformed services.

Referred to as the G Fund, it invests in U.S. government notes and bonds, all backed by the full faith and credit of the U.S. government. However, the current returns on the investments are extremely low.

Because of the current low interest rate environment, the G Fund has averaged a return of just 1.47 percent over the past year and has averaged 2.69 percent over the past five years. At that rate, it would take slightly more than 24 years for an initial investment to double in value.

According to the TSP website, an initial investment of $100 when the G Fund was created in April 1987 would be worth $416 today. However, adjusted for inflation, the true value after 26 years would be $206.

While the myRA has its benefits, there are many other tax-favored retirement savings plans giving savers and investors a wide range of alternations. From traditional to Roth IRAs, 401(k) and other employer-sponsored retirement plans, to personal investment accounts, people planning for their retirement have the universe of stocks, bonds and mutual funds available.

Documents on the White House website discuss another provision of the myRA that is raising concerns.

“Current retirement tax subsidies disproportionately benefit higher-income households, many of whom have saved with or without incentives,” comments the White House documents.

“The president has proposed to limit the benefits of tax breaks, including retirement savings preferences, for high-income households to a maximum of 28 percent. The president has also proposed to limit contributions to tax-preferred savings accounts once balances are about $3.2 million, large enough to fund a reasonable pension in retirement,” according to the White House.

It didn’t take long for the Investment Company Institute, a industry organization for the mutual fund industry, to respond to the president’s plan reduce the tax benefits of retirement saving.

“While we welcome the president’s effort to create new retirement savings opportunities, it is with regret and deep concern that we heard his comments about reducing the retirement tax incentives that have been part of the foundation for the success of the private-sector retirement system for all Americans, including hard-working middle income Americans,” the ICI statement said.

The group reports 86 percent of households surveyed disagree the government should take away the tax advantages of direct-contribution accounts, as well as limit the amount that can be contributed.

Bottom line, millions of hardworking, middle income households have used traditional retirement planning vehicles to build a nest egg to prepare for the future. Changing the rules could significantly deter others from doing the same.